Tuesday, October 7, 2008

Royal Bank of Scotland – some comments

One of the first posts I made on this blog was about Royal Bank of Scotland.In it I described Sir Fred Goodwin as "the worst CEO of any big bank anywhere".

I promised a Sir Fred Goodwin Death Watch part II and III and had articles written – but the stock got ahead of me – and I didn’t much feel like picking the wings off butterflies.

Besides I thought I was just being vindictive.My worst ever day at work was provided by Sir Fred.I was short a very large amount of Charter One (a Midwest Bank) and Sir Fred purchased the company for a substantial premium.I cost my clients many tens of millions of dollars.

In my history of US Finance note I drolly noted that the (then) universal acceptance that the acquisition of Charter One was dramatically overpriced provided “thin consolation, but no refund”.My motives for going after Sir Fred were not entirely pure – so I decided to steer clear. (Sir Fred - the refund would be nice...)

Besides – in the scheme of things Sir Fred raised a lot of capital.Enough to cover a multitude of sins.I thought RBS would survive.I thought (incorrectly) that long RBS short Barclays was probably a good pair.Thankfully I never put it on.

Now RBS is at the edge.It looks like it is failing.It might survive – so I don’t want to fan the fire too much.However the stock price is plenty fanning the fire.

At year end RBS had the biggest balance sheet of any bank anywhere in the world.This balance sheet was inflated as it consolidated Fortis’s position in ABN Amro for instance.Even net of this however RBS really matters.

RBS could provide the alternative test – too big and too global to bail out.RBS is heavily integrated in the United States where it is one of the top ten banks.The UK end is large relative to the UK economy and sterling is falling on the panic – the UK Government cannot do RBS alone – and the US end will need a US backstop.RBS has large operations in many countries (including for instance a deposit base in Switzerland and a lending business in my home country of Australia).I have no idea how the various governments will be involved – but I would seriously doubt that Australia would contribute.

But for the time being I will take you back to one of the best – but most un-noticed business articles in the world this year.It was by Bethany McLean in Fortune in Mid February.

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.